Many investors are holding their breaths today awaiting the IPO of Webvan(Nasdaq: WBVN). The online grocer with ambitious plans, with a billion dollar deal with Bechtel to build as many as 36 different distribution centers over the next three years, has certainly captured investors' imaginations.

So, with the spotlight shining on the likely candidate to become the first to scale, what's up with the first mover in the online grocery space -- Peapod (Nasdaq: PPOD).

Peapod went public in the summer of 1997 at $16 a share. It was not a hot IPO. While investors had learned to be forgiving in terms of an e-commerce company with mounting losses, the model just didn't sit right. Peapod would accept grocery orders online. So far, so good. But then it would send out employees to the nearby market to pluck the items off the shelves, pay for them, then deliver them at the same cost -- charging a delivery charge or monthly membership fee.

It seemed too low-tech for a wired high-tech world. Peapod would eventually strike a deal with Safeway(NYSE: SWY), only to top that by eventually going the more logical distribution center route. Beyond logistics, Peapod just wasn't a growing company. Once Peapod entered its eighth metropolitan market, sales and customer accounts actually dipped.

Jaded shareholders were perplexed. Wasn't there supposed to be growth in growth stocks? The only things growing at Peapod were the quarterly deficits.

Then came Webvan. While a well-funded competitor storming the market could have had an adverse effect on Peapod, any publicity was good publicity. Peapod was trading at just above $5 a share this summer. An established player with a $100 million market cap seemed strange in light of Webvan's proposed $3.5 billion price tag.

Having just rolled out service in the San Francisco Bay area, Webvan had posted sales of just $395,000 over the first half of the year. In that time, Peapod had rung up $35 million in orders. Even if everyone knew that David was packing a cannon for a slingshot, the sleepy Goliath seemed way underpriced in comparison. Peapod sprouted -- and shareholders reaped the harvest.

Business Description

Peapod is the country's largest Internet grocer -- for now. It services 92,900 members in eight major cities. The Illinois-based company also provides media and research services to companies like Hershey(NYSE: HSY) and Coca-Cola(NYSE: KO) on consumer shopping trends online. The company, through its Split Pea Software subsidiary, also licenses its technology -- as it did with Australia's Coles Meyer two years ago.

Peapod Packages was rolled out last quarter to allow for the shipped delivery of nonperishable goods nationwide.

Balance Sheet (as of 6/30/99)
Cash: $3.1 million
Current Assets: $23.4 million
Current Liabilities: $8.2 million
Long-term Debt: $1.1 million

RatiosPrice-to-earnings: N/A
Price-to-sales: 2.6

How Could You Have Found This Double?

Cybergrocers are taking the country by storm. On Tuesday, HomeGrocer.com announced that it had received $100 million in venture capital funding. Back in May Amazon.com(Nasdaq: AMZN) invested $42.5 million for a 35% stake in the budding grocery store. And Webvan has been a hot topic ever since it signed its massive distribution deal.

Every time an online grocer makes headlines, odds are Peapod was mentioned somewhere in the story. Any why not? Last year the company accounted for 46% of all online grocery purchases.

With HomeGrocer just entering its third metropolitan market (Orange County, California -- after taking on Seattle last year and Portland in May), and Webvan slated to break into second market, Atlanta, in the spring, Peapod is a seasoned veteran in relative terms.

Digging deeper into Peapod's stagnant financials would have been disheartening. However, its position in the market, possibly benefiting from Webvan and HomeGrocer taking the genre into the mainstream, was something that could not be ignored.

Where to From Here?

Peapod is servicing areas where the population tops eight million residents. Unfortunately, only just over 1% of that group has seen a Peapod delivery truck pull up its driveway. The average orders, at $120, are impressive. Then again, just 130,200 orders were placed in the September quarter. That means that the average Peapod member placed just 1.4 orders over those three months.

The number of open accounts has also fallen over the past year -- despite serving one less market a year ago.

Rolling out distribution centers has bulked up margins. Gross margins for the quarter topped 25% -- a far cry from when the gross margins were nil because the company was simply charging the customer what it was paying the supermarket.

However, partly because of the high costs of the centralized fulfillment centers, the margin improvement has not made it to the bottom line. The losses have widened. The one bright spot was that sales actually rose in September.

Even with Webvan and HomeGrocer gunning at the speed of light, Peapod might still be able to grow. While the company lacks the financial muscle to launch a Webvanesque expansion -- or HomeGrocer-type one for that matter, given that HomeGrocer announced that it might open shop in as many as 20 new markets by the end of next year -- Peapod, and its dwindling cash hoard of just $16.4 million, will live on.

While trading at a fraction of Webvan's market cap, and apparently at what should be a discount to HomeGrocer's value when it goes public, will Peapod live on independently?

Whether Webvan makes a play for Peapod, or HomeGrocer does it to back into publicly traded status, Peapod is probably going to be in demand in the near term. Since being the first to scale appears to come with an ill-fitting winner-take-all mindset, Peapod might even become prized pickings for a major supermarket chain looking to hurl itself online in a hurry. Up to now, only a few chains like Dominck's and Whole Foods Market(Nasdaq: WFMI) have made serious online moves.